Netflix’s negative free cash flow, which reached a high of $3 billion in 2018, has been one of the few sources of worry for Wall Street analysts and investors. Netflix has said it needs negative free cash flow to fund its increased investment in original TV shows and movies, but it’s hard to assess the…

Netflix’s negative free cash flow, which reached a high of $3 billion in 2018, has been one of the few sources of worry for Wall Street analysts and investors.

Netflix has said it needs negative free cash flow to fund its increased investment in original TV shows and movies, but it’s hard to assess the value of that content over their lifetime, making it difficult to project the company’s financial future.

But Morgan Stanley sees signs that Netflix’s financials are on the right track and predicts the streaming giant will become free cash flow positive in 2021 and reach over $10 billion in positive free cash flow in 2025.

As Netflix has morphed from David into Goliath, there has been one lingering question lurking around the positive chatter: When is this company going to stop burning cash?

Netflix said it expected its negative free cash flow to reach $3 billion in 2018, up from $2 billion in 2017 (we’ll know for sure when it reports earnings on January 17).

“When we produce an amazing show like ‘Stranger Things,’ that’s a lot of capital up front, and then you get a payout over it over many years,” Hastings said. “And seeing the positive returns on that for the business as a whole is what makes us comfortable that we should continue to invest.”

Netflix’s production of original series like “Stranger Things” has ramped up over the last few years, and the company has made moves to own the entire production and distribution pipeline by signing big-name hitmakers like Shonda Rhimes and Ryan Murphy in deals worth hundreds of millions. That strategy has been validated as competitors from Disney to AT&T have announced their own streaming services, and the market for licensing TV shows and movies has become increasingly crowded. Netflix needs original productions — and a lot of them — to sustain subscriber growth.

But as Hastings noted, making a premium TV show requires a ton of money up front. And it’s hard for investors and analysts to value what a piece of IP will be worth to Netflix over its lifetime — or even what Netflix’s entire library of TV shows and movies is worth in total.

Some shows like “Friends,” which Netflix recently renewed the rights to stream at a reported cost of up to $100 million, retain massive value as a part of the service’s streaming library. But the value for other shows fades quickly. And the difficulty in judging that rate of deterioration makes it hard to value Netflix’s new original shows and its library over time.

That’s one reason why investors will breathe a sigh of relief when Netflix’s free cash flow turns positive, and the piece of Netflix’s accounting that requires a pinch of faith is made clearer. Until then, Netflix will continue to utilize billions in debt to fund its productions.

But there are signs Netflix’s free cash flow will turn positive in 2021, according to a recent note by Morgan Stanley analysts.

“Even as spending grows, unit economics continue to improve, with margins benefiting from scale and pricing power: Exclusive global originals are a key driver of Netflix’s model, resulting in higher engagement and lower churn,” the analysts wrote. “While the level of cash spend has increased, Netflix continues to drive higher contribution profits per subscriber, which is up over 30% annually for the last two years. As the gap between cash spend and content amortization closes, we see a path for free cash flow to reach breakeven in 2021E, with strong expansion thereafter fueled by continued subscriber adoption and ARPU growth.”

And it will only keep climbing from there, with the analysts expecting it to reach over $5 billion in 2023, and over $10 billion in 2025.

Here’s a chart a chart showing how Morgan Stanley expects it to progress over the next few years: